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Thursday, October 27, 2005

Greenspan on the Role of the Council of Economic Advisers

Federal Reserve Chair Alan Greenspan discusses the contributions of the Council of Economic Advisers and other agencies created by the Employment Act of 1946 in a speech given today in St. Louis. This is somewhat timely given the vacancy at the CEA created by Bernanke's departure, if confirmed, to become Fed chair:

Receipt of the Truman Medal for Economic Policy, Remarks by Chairman Alan Greenspan, October 26, 2005: ...[P]art of Truman's importance derives from the fact that several key new governmental structures were established during his Administration. Among these were the Council of Economic Advisers (CEA) and the Joint Economic Committee of the Congress (JEC). These organizations were established by the Employment Act of 1946... Two ingredients seem to have been essential precursors of the Employment Act. The first was a deep concern that the problem of peacetime unemployment had not been solved. ...many feared that the economy would slip back into depression. The second element was the economic thinking of John Maynard Keynes. ... President Truman's memoirs make clear that both of these strands ... influenced his request to the Congress for full employment legislation in the fall of 1945. ... Early drafts of the Employment Act enshrined ... new processes and institutions, ... the CEA, the annual Economic Report of the President, and the JEC... The CEA consists of a chairman and two other members, ...Over the years, the CEA has provided objective and professional economic advice at the highest levels in the White House. ... A hallmark of the ethos of the CEA is the pride that its staff members take in providing objective analysis. ... Because the CEA has retained its small size over the years, it can be quick and nimble in ways that are difficult for some larger agencies. Moreover, because the CEA is viewed as a neutral agency without ties to any particular constituency, the CEA often has played an important role on interagency committees and working groups... Along those lines, perhaps the most important role of the CEA has been to scuttle many of the more adventuresome ideas that inevitably bubble up through the machinery of government. ... This role of the CEA is wholly unheralded--after all, who hears about the idea that never came to fruition--but it serves as an important check in the policymaking process. ... Of course, as chairman of the Council during President Ford's Administration, I was close to some of these debates and decisions. ...I began work at the CEA in September 1974. ... I found my time there quite rewarding, ... I will only highlight three themes that recurred during my tenure. First, economic modeling is as much art as science. ... Economic models provide a set of useful tools to frame future outcomes; but ... models can go off track in myriad ways. Objective and thorough analysis, as is the norm at the CEA, is the most effective counterweight to this challenge. Second, high-quality and timely data are crucial inputs to the process of making economic policy. ... Finally, as hard as this can be to achieve, economic policy should take the long view. Although pressures to use the government's tools of economic management to achieve one or another short-term aim are always present, the tools of government are, in fact, most appropriately used to create an environment in which private economic activity can flourish over the longer run...

What's left unstated, and the hard part of the statement at the end, is deciding what the "longer run" is, particularly in light of the long lags before monetary policy takes full effect. Obviously, the Fed cannot manage aggregate output hourly, daily, or even weekly. But what about monthly output? Quarterly? Annual? When there is a recession, a short-run event around the long-run trend the Fed, even Greenspan's Fed responds by lowering rates. Deciding whether an event is a short-term cyclical fluctuation of little concern to the Fed, or a medium term fluctuation that requires action is part of the art of policymaking Greenspan discusses. This task is made harder by having imperfect models of the economy and this explains his craving for more high-quality and timely data. Greenspan proved to be quite skilled at untangling more persistent fluctuations from more transitory ones and this is one reason for his success as Chair of the Fed.

    Posted by on Thursday, October 27, 2005 at 12:24 AM in Economics, Fed Speeches, Monetary Policy, Policy, Taxes | Permalink  TrackBack (0)  Comments (1)

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